Yesterday’s claim by the Monetary Policy Committee (MPC) that UK interest rates may need to rise faster than the Bank of England (BoE) had predicted just three months ago continues to boost the GBP/AUD exchange rate this morning.

The Pound Sterling to Australian Dollar exchange rate is up 0.2% today as markets continue to favour GBP following yesterday’s ‘Super Thursday’ announcements from the UK central bank.

Although policymakers voted unanimously to keep interest rates frozen at 0.5%, the meeting minutes and Inflation Report stated that members of the MPC were no longer willing to tolerate inflation trending above the target level of 2% over the coming few years.

The bank largely attributed this to the lack of capacity in the UK economy, although the BoE did note that the uncertainty surrounding Brexit could still affect businesses and consumption and weaken output growth.

Former member of the MPC and current Senior Economic Adviser at PwC Andrew Sentance was particularly upbeat about the monetary policy outlook following the release of the minutes and Inflation Report, stating:

‘All this points to rising interest rates, both here in the UK and in other major economies. It is still likely that we will see at least one quarter point rise in 2018 and possibly two or three.’

The Reserve Bank of Australia (RBA) released its latest quarterly statement on monetary policy this morning.

Policymakers continue to expect strong economic growth, with GDP forecasts for 2018 and 2019 clocking in at around 3.25% annually.

The Reserve Bank of Australia also predicted a downtick in the employment rate from 5.5% to 5.25% during 2018 and 2019.

RBA Governor Philip Lowe recently stated that unemployment was one of the key metrics in which improvement needed to be seen before policymakers would consider hiking borrowing costs.

However, the other was inflation, which the Reserve Bank of Australia predicts will remain below the lower bound of the bank’s 2% to 3% target range for much of this year, before climbing to 2.25%.

This gloomy outlook over price growth has therefore suggested that the RBA does not feel conditions in the economy will warrant a tightening of borrowing costs for some time yet, with the next rate hike potentially not arriving until 2019, assuming the current economic uptrend does not accelerate above forecasts.

The upcoming UK data slew threatens to push the GBP/AUD exchange rate lower this morning, given that forecasts are largely for weakening on previous figures.

December’s industrial and manufacturing production and construction output figures are largely expected to show a slowdown in growth, if not declines.

While the trade deficit for December is expected to have narrowed by around -£400 million, the latest GDP estimate from the National Institute of Economic and Social Research (NIESR) is predicted to have slowed from 0.6% to 0.5%.

Considering the PMIs released by Markit for January a few days ago also pointed towards a slowdown in economic growth at the beginning of the year, there is a chance that the NIESR’s estimate could be even lower.

This could dampen appetite for the Pound, given that the Bank of England yesterday cited strength in the economy as necessitating a faster-than-expected pace of monetary policy normalisation.

However, GBP/AUD exchange rates could be protected from sharp losses in the event of negative data due to the fact that there are no Australian eco-stats left for release today.

With the recent dovish RBA statement and key Canadian employment figures on the cards, the Australian Dollar could find itself as the least-appealing of the commodity trio and therefore weaken as markets switch to favouring the New Zealand Dollar.

There is no US data of note set for release today, but the strong odds of an interest rate hike from the Federal Reserve next month could also serve to keep downwards pressure on the Australian Dollar, allowing the GBP/AUD exchange rate to hold current levels or even advance.

John Cameron

John studied economics at Cambridge University and later became an MSTA qualified Technical Analyst. He began working for TorFX almost a decade ago and now holds a Senior Account Manager position. As well as lending his clients support and guidance, John has produced market commentary and detailed exchange rate analysis for a number of online publications.

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